Economic Overhaul…will it help?

EU leaders agreed to a new plan for economic overhaul and increase in bailout funds for at-risk EU countries in the 17-member EU zone on Saturday. This meeting was in preparation for the “full summit meeting” being held on March 24-25, 2011. The President of the European Central Bank begged France and Germany to allow the bailout fund to buy bonds from weak countries that the central bank has accumulated during the economic crisis. However, Germany and France refused.

EU leaders approved an increase in the amount of funds that bailout facilities could provide to 500 million euros, and they agreed to create a permanent fund in 2013 when the current fund is due to expire. The meeting also (1) approved provisions allowing bailout funds to buy bonds directly from euro-zone countries, whereas now, the bailout funds can only loan money, and (2) the bailout monies will now take capital contributions from countries for financing instead of just financing through guarantees. The second approved provision may require countries with weak economies to put up cash because their guarantees are not as strong as countries like Germany and France.

There were some points of contention amongst the EU leaders this past weekend. For one, German and French leaders did not want to permit the purchase of existing government bonds. Rather, they wanted to only allow for the purchase of new bonds directly from governments, mainly to prevent the bailout funds from drastically increasing.

Ultimately, the provisions for the economic overhaul that were submitted a few months ago have been softened.

One comment

  1. This sounds like a sticky spot to be in, either increase the bailout fund for countries that are not pulling their weight or risk letting them fail and having your economy doomed by a shared currency. Part of what made the recent financial crisis into a world financial crisis was the degree in which so many countries were voluntarily and informally tied together. The domino effect in Europe, Greece, Ireland, Portugal, Spain, etc., clearly shows what happens when so many independent economies are linked together through a common currency. The situation is identical to a group of hikers walking along a cliff harnessed together, if one person slips, the harness will save them, but as more people fall, it will doom them all.

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